ECS3705
NOTES
,Exam Preparation: Herewith all the questions (according to sections) of the
last 6 exam papers.
Section A: This section counts 40 marks – have to explain 8 concepts counting 5 marks each.
• The fear of goods
One of the principles of the Mercantilist school is duty free importation of raw materials that could not be
produced domestically, protection for manufactured goods and raw materials that could be produced
domestically and export restrictions on raw materials. Emphasis on exports & a reluctance to import has
been called the fear of goods.
• The division of labour
Petty did not develop this idea in details but he did recognize the economies associated with the
specialization of labour and division of tasks. Adam Smith later further developed the idea. Smith said the
division of labour increased the quantity of output produced for 3 reasons – 1. Each worker develops
increase dexterity in performing on single task repeatedly. 2. Time is saved as workers need not go from one
task to the other. 3. Machinery can be designed to increase productivity once tasks have been simplified &
made routine.
• Why, according to Marx, capitalists exploit labourers
According to Marx all commodities sell at their value and thus to make a profit capitalists had to
purchase a commodity that can create value greater than its own – labour. Exploitation only arise when
workers can produce more in a day than they must consume in order to maintain themselves and their
families. Employers (capitalists) pay the worker the full market value of their labour power but the daily
pay equals only part of the value the labourers create. Thus there is a surplus. This surplus is then the
profit for the capitalist while the labourers are exploited.
• Inductive, historical method vs abstract, deductive method
Inductive, historical method is the German Historical school. Economists of this school emphasized the
importance of studying the economic historically as part of the integrated whole. Abstract, deductive
method is the Marginalist school. Marginalists rejected the historical method in favor of abstract,
deductive, analytical approach pioneered by Ricardo and other classicist.
• Partial equilibrium analysis vs general equilibrium analysis
Partial equilibrium analysis was used by Marshall. It only considers one aspect while leaving all other
aspects constant. Example: If the price of oil increases, demand will decrease cetris paribus. General
equilibrium analysis considers the interrelationship among many variables in the economy and was
developed by Leon Walras. The GEA looks at every aspect this increase in the price will have – substitute
demand will rise, other products prices will rise due to this increase thus reducing their demand,
complementary goods demand will fall etc. The GEA looks at the bigger picture while PEA only looks at one
piece of the picture.
• The long-run Phillips curve
Each short run Phillips curve shows the combinations of inflation and unemployment that are possible when
the actual rate of inflation diverges from the expected rate. In the long run there is no trade off between
inflation & unemployment. The long run Phillips curve is vertical, indicating that any one of several rates of
inflation is compatible with the natural rate of unemployment.
,• “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but
from their regard to their own interest”
This statement was made by Adam Smith who was one of the major contributors of the Classical School.
The consumer looks to find the lowest price for a good, given its quality. The worker tires to find the highest
pay, given the nonwage aspects of the job. Each of these members of the market look out for themselves
(self-interest) by first meeting their own needs but still give the client a far deal. Thus they are still being
moral and everyone is better off in the end.
• Functional distribution of income according to Ricardo
Ricardo wanted to understand the force that determine the shares of
the national income accruing as wages, profits & rents (interest was
combined with profit). Wages – natural price is given the habits &
customs of the people, enables workers to subsist and to perpetuate
themselves without a change in their numbers. Market price depends
on supply & demand. Ricardo felt that the rates f profits in different
fields of enterprise within a country tend to equalize. Entrepreneurs
want the highest profits and move money to obtain this. Due to
increase demand for food poorer land will come into cultivation and
will cause better land to be worked more intensively. Rent will
therefore rise. Nominal wages will also rise to maintain the natural
wage. Thus profit rates and profit share of national income will fall.
• Wage fund doctrine
Mill, like many before him, accepted the wage fund doctrine. Wages according to him depend mainly upon
labour demand & supply. Wages cannot rise except by an increase of the aggregate funds employed in
hiring labourers or by a decrease in the numbers of workers employed. Wages cannot fall except by a
decline of the funds devoted to paying for labour or by an increase in the numbers of labourers to be paid.
According to Mill, government cannot increase total wage payments by fixing a minimum wage about the
equilibrium level. The higher wages that some workers would receive will be offset by the loss of
employment others will face. This doctrine provided a basis for opposing unionism but Mill did not use it for
this purpose. Workers cannot raise their income through collective action – if wages rise in one place it falls
in another.
• Institutions
An institution is not merely an organization or establishment for the promotion of a particular objective, like
a school/prisons/union. It is also an organized pattern of group behaviors, well established and accepted as
a fundamental part of the culture. It includes customs, social habits, laws, modes of thinking and ways of
living.
• Institutions and their role in Institutionalist economics
An institution is not merely an organization or establishment for the promotion of a particular objective, like
a school/prisons/union. It is also an organized pattern of group behaviors, well established and accepted as
a fundamental part of the culture. It includes customs, social habits, laws, modes of thinking and ways of
living. Economic life, according to institutionalist, is regulated by economic institutions, not by economic
laws. Institutionalists were especially interested in analyzing and reforming the institutions of credit,
monopoly, absentee ownership, labour management relations, social security and the distribution of
income. They advocate economic planning & the mitigation of the swings of the business cycle.
• Soviet of technicians according to Veblen
There is constant conflict between two sides – industries and business, big and small... Veblen was critical &
friendly towards socialism but was not a socialist himself. Veblen though engineers – the technicians of
society – might eventually lead the social revolution and operate industry for the common good. They are
the ones to object ownership, finance, sabotage, credit and unearned income because these interfere with
technological efficiency and progress. Engineers are the best representation of the community at large,
, because capital and labour, bargaining over prices have become a loose knit vested interest that seeks its
own benefit to the detriment of society. The outcome has been business like concessions and compromise
between them. The two sides play a game of chance and skill, with the industrial system becoming a victim
of interference on both sides. Material welfare of the community depends on the smooth working of the
industrial system without interference. Engineers can achieve this as unlike owners and workers they are
not motivated by self interest. Because they are more homogeneous and unified they are natural leaders
and people with spirit of tangible performance and the most highly developed instinct of workmanship.
Veblen believed technicians could solve the nation’s problems but the chances of this happening was
remote.
• Quasi-rent according to Marshall
In the short run land and manufactured capital goods are similar because the supply of both is fixed. The
return to old capital investments is something akin to rent: Marshall called it Quasi-rent. Quasi-rent is the
earning on previous capital investments in the short run. In the long run quasi-rent disappears because a
normal return to the fixed capital investment is essential if the investment isto be renewed and business
perpetuated.
• Why, according to Keynes, the economy is inherently unstable
According to Keynes the economy is given to recurring booms & busts because the level of planned
investment spending is erratic. Changes in investment plans cause national income and output to change by
amounts greater than the initial changes in investments. Equilibrium levels of investment and saving – those
that are applicable after the adjustment has occurred – are achieved through changes in national income as
opposed to changes in the rate of interest. Investment spending is determined jointly by the rate of interest
and the marginal efficiency of capital. Interest rate depends on people’s preference for liquidity and the
quantity of money. Marginal efficiency of capital depends on the expected future profits and the supply
price of capital. The expected rate of profit from new investment is unstable and therefore one of the most
important causes of business fluctuation.
• Malthus’s explanation for the failure of Say’s Law
Malthus saw the economy as having perfectly synchronized production rounds of equal lengths. Thus all
firms start producing at the same time, pay wages at the same time and start selling fished goods at the
same time. It would then appear that the finance to buy up the output of the current production round
consists of nothing more than the wages paid out during the current production round. Entrepreneurs
are thus prevented from making any profit even when workers spend their wages in full (no leakages).
Because these wages are a cost of production for the firm, the following must hold for the firm sector as
a whole: aggregate demand for goods = cost of producing these goods. Firms can at best earn back
what they previously paid in wages and demand is never sufficient for firms to make a profit. As a result
of not making a profit, firms will not be inclined to invest and economic activity would stagnate. This
was the problem Malthus saw. The only way for firms to make a profit is to find a demand for their
goods which is not a cost of production for them.
• The commonalities of socialism (ie what all forms of socialism have in common)
1. Rejection of classical view about harmony of interest between classes of society
2. Rejection of classical concept of laissez-faire
3. Rejection of classical idea of Say’s Law (markets are inherently unstable)
4. Perfectibility of people given the right social system; with the right system, people will become good
5. Need for some kind of collective action or state ownership
NOTES
,Exam Preparation: Herewith all the questions (according to sections) of the
last 6 exam papers.
Section A: This section counts 40 marks – have to explain 8 concepts counting 5 marks each.
• The fear of goods
One of the principles of the Mercantilist school is duty free importation of raw materials that could not be
produced domestically, protection for manufactured goods and raw materials that could be produced
domestically and export restrictions on raw materials. Emphasis on exports & a reluctance to import has
been called the fear of goods.
• The division of labour
Petty did not develop this idea in details but he did recognize the economies associated with the
specialization of labour and division of tasks. Adam Smith later further developed the idea. Smith said the
division of labour increased the quantity of output produced for 3 reasons – 1. Each worker develops
increase dexterity in performing on single task repeatedly. 2. Time is saved as workers need not go from one
task to the other. 3. Machinery can be designed to increase productivity once tasks have been simplified &
made routine.
• Why, according to Marx, capitalists exploit labourers
According to Marx all commodities sell at their value and thus to make a profit capitalists had to
purchase a commodity that can create value greater than its own – labour. Exploitation only arise when
workers can produce more in a day than they must consume in order to maintain themselves and their
families. Employers (capitalists) pay the worker the full market value of their labour power but the daily
pay equals only part of the value the labourers create. Thus there is a surplus. This surplus is then the
profit for the capitalist while the labourers are exploited.
• Inductive, historical method vs abstract, deductive method
Inductive, historical method is the German Historical school. Economists of this school emphasized the
importance of studying the economic historically as part of the integrated whole. Abstract, deductive
method is the Marginalist school. Marginalists rejected the historical method in favor of abstract,
deductive, analytical approach pioneered by Ricardo and other classicist.
• Partial equilibrium analysis vs general equilibrium analysis
Partial equilibrium analysis was used by Marshall. It only considers one aspect while leaving all other
aspects constant. Example: If the price of oil increases, demand will decrease cetris paribus. General
equilibrium analysis considers the interrelationship among many variables in the economy and was
developed by Leon Walras. The GEA looks at every aspect this increase in the price will have – substitute
demand will rise, other products prices will rise due to this increase thus reducing their demand,
complementary goods demand will fall etc. The GEA looks at the bigger picture while PEA only looks at one
piece of the picture.
• The long-run Phillips curve
Each short run Phillips curve shows the combinations of inflation and unemployment that are possible when
the actual rate of inflation diverges from the expected rate. In the long run there is no trade off between
inflation & unemployment. The long run Phillips curve is vertical, indicating that any one of several rates of
inflation is compatible with the natural rate of unemployment.
,• “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but
from their regard to their own interest”
This statement was made by Adam Smith who was one of the major contributors of the Classical School.
The consumer looks to find the lowest price for a good, given its quality. The worker tires to find the highest
pay, given the nonwage aspects of the job. Each of these members of the market look out for themselves
(self-interest) by first meeting their own needs but still give the client a far deal. Thus they are still being
moral and everyone is better off in the end.
• Functional distribution of income according to Ricardo
Ricardo wanted to understand the force that determine the shares of
the national income accruing as wages, profits & rents (interest was
combined with profit). Wages – natural price is given the habits &
customs of the people, enables workers to subsist and to perpetuate
themselves without a change in their numbers. Market price depends
on supply & demand. Ricardo felt that the rates f profits in different
fields of enterprise within a country tend to equalize. Entrepreneurs
want the highest profits and move money to obtain this. Due to
increase demand for food poorer land will come into cultivation and
will cause better land to be worked more intensively. Rent will
therefore rise. Nominal wages will also rise to maintain the natural
wage. Thus profit rates and profit share of national income will fall.
• Wage fund doctrine
Mill, like many before him, accepted the wage fund doctrine. Wages according to him depend mainly upon
labour demand & supply. Wages cannot rise except by an increase of the aggregate funds employed in
hiring labourers or by a decrease in the numbers of workers employed. Wages cannot fall except by a
decline of the funds devoted to paying for labour or by an increase in the numbers of labourers to be paid.
According to Mill, government cannot increase total wage payments by fixing a minimum wage about the
equilibrium level. The higher wages that some workers would receive will be offset by the loss of
employment others will face. This doctrine provided a basis for opposing unionism but Mill did not use it for
this purpose. Workers cannot raise their income through collective action – if wages rise in one place it falls
in another.
• Institutions
An institution is not merely an organization or establishment for the promotion of a particular objective, like
a school/prisons/union. It is also an organized pattern of group behaviors, well established and accepted as
a fundamental part of the culture. It includes customs, social habits, laws, modes of thinking and ways of
living.
• Institutions and their role in Institutionalist economics
An institution is not merely an organization or establishment for the promotion of a particular objective, like
a school/prisons/union. It is also an organized pattern of group behaviors, well established and accepted as
a fundamental part of the culture. It includes customs, social habits, laws, modes of thinking and ways of
living. Economic life, according to institutionalist, is regulated by economic institutions, not by economic
laws. Institutionalists were especially interested in analyzing and reforming the institutions of credit,
monopoly, absentee ownership, labour management relations, social security and the distribution of
income. They advocate economic planning & the mitigation of the swings of the business cycle.
• Soviet of technicians according to Veblen
There is constant conflict between two sides – industries and business, big and small... Veblen was critical &
friendly towards socialism but was not a socialist himself. Veblen though engineers – the technicians of
society – might eventually lead the social revolution and operate industry for the common good. They are
the ones to object ownership, finance, sabotage, credit and unearned income because these interfere with
technological efficiency and progress. Engineers are the best representation of the community at large,
, because capital and labour, bargaining over prices have become a loose knit vested interest that seeks its
own benefit to the detriment of society. The outcome has been business like concessions and compromise
between them. The two sides play a game of chance and skill, with the industrial system becoming a victim
of interference on both sides. Material welfare of the community depends on the smooth working of the
industrial system without interference. Engineers can achieve this as unlike owners and workers they are
not motivated by self interest. Because they are more homogeneous and unified they are natural leaders
and people with spirit of tangible performance and the most highly developed instinct of workmanship.
Veblen believed technicians could solve the nation’s problems but the chances of this happening was
remote.
• Quasi-rent according to Marshall
In the short run land and manufactured capital goods are similar because the supply of both is fixed. The
return to old capital investments is something akin to rent: Marshall called it Quasi-rent. Quasi-rent is the
earning on previous capital investments in the short run. In the long run quasi-rent disappears because a
normal return to the fixed capital investment is essential if the investment isto be renewed and business
perpetuated.
• Why, according to Keynes, the economy is inherently unstable
According to Keynes the economy is given to recurring booms & busts because the level of planned
investment spending is erratic. Changes in investment plans cause national income and output to change by
amounts greater than the initial changes in investments. Equilibrium levels of investment and saving – those
that are applicable after the adjustment has occurred – are achieved through changes in national income as
opposed to changes in the rate of interest. Investment spending is determined jointly by the rate of interest
and the marginal efficiency of capital. Interest rate depends on people’s preference for liquidity and the
quantity of money. Marginal efficiency of capital depends on the expected future profits and the supply
price of capital. The expected rate of profit from new investment is unstable and therefore one of the most
important causes of business fluctuation.
• Malthus’s explanation for the failure of Say’s Law
Malthus saw the economy as having perfectly synchronized production rounds of equal lengths. Thus all
firms start producing at the same time, pay wages at the same time and start selling fished goods at the
same time. It would then appear that the finance to buy up the output of the current production round
consists of nothing more than the wages paid out during the current production round. Entrepreneurs
are thus prevented from making any profit even when workers spend their wages in full (no leakages).
Because these wages are a cost of production for the firm, the following must hold for the firm sector as
a whole: aggregate demand for goods = cost of producing these goods. Firms can at best earn back
what they previously paid in wages and demand is never sufficient for firms to make a profit. As a result
of not making a profit, firms will not be inclined to invest and economic activity would stagnate. This
was the problem Malthus saw. The only way for firms to make a profit is to find a demand for their
goods which is not a cost of production for them.
• The commonalities of socialism (ie what all forms of socialism have in common)
1. Rejection of classical view about harmony of interest between classes of society
2. Rejection of classical concept of laissez-faire
3. Rejection of classical idea of Say’s Law (markets are inherently unstable)
4. Perfectibility of people given the right social system; with the right system, people will become good
5. Need for some kind of collective action or state ownership
